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Thursday, April 09, 2009

Which Tax Cuts Have Stimulated the Economy?

"'We tried that, and it didn't work,' Obama and his partisans sneer in response to arguments that tax cuts are the key to restoring economic growth." 

But as Peter Ferrara writes in the American Spectator cuts to marginal tax rates and capital gains rates - such as the tax cuts of John F. Kennedy, Ronald Reagan, George W. Bush in 2001 and 2003 - all resulted in accelerating (or "stimulating") economic growth.  Other tax cuts - namely credits, rebates, and redistribution through the tax code, such as those pushed by Bush in 2008 and Obama in 2009 - don't do anything to stimulate the economy. 

Such tax rebates or tax credits do not work to stimulate economic growth because they do not change the fundamental incentives that govern the economy. A $500 tax credit or tax rebate involves the government either explicitly or effectively sending you a check for $500. But after that you and everyone else still face the same tax rates and same economic incentives. 

Tax cuts do not expand the economy by "putting more money in people's pockets," thereby leading to increased spending. Increased welfare benefits would put more money in people's pockets as well. But this is an outdated Keynesian rationale from the 1930s that increasing spending will increase growth to meet the demand. That does not work for two reasons. First, the government has to borrow or tax the money from someone else in the economy to give you the tax credit or increased welfare check. So, if it takes $500 out of the economy to give you $500 through the tax credit or increased welfare, it has not added anything to the economy on net. Secondly, again, there is no change in fundamental incentives. ...

As of this month, we are in the longest recession since World War II. The National Bureau of Economic Research scores this recession as having started in December, 2007. Yet, from the beginning we have followed old-fashioned, Keynesian tax cut stimulus policies, first under Bush, but then continued under Obama, rather than the amazingly successful tax rate cut policies of Kennedy and Reagan. That is why this is the longest recession since World War II, with still no end in sight, and unemployment persistent and relentlessly climbing. 


Imee said...

Certain tax cuts have stimulated the economy, regardless of who's in office. But there's still other ways of getting the ball rolling aside from that, so I guess we'll have to try in order to see if those other stuff from the stimulus will generate a better economy.

Nathan Benefield said...

"Those other stuff", referring to government spending as a stimulus, have been tried repeatedly - and always have failed.